No country for old men

Spanish government is putting forward some private pensions’ reforms amid raising concerns on the sustainability of the state pension system.

Ageing population and fall of birth are leading to an increase in the number of pensioners compared with the number of contributors, which in addition with the fall of wages diminishes progressively promises of the state pension scheme.

While Spanish are living longer than ever before, the fertility rate has sagged over the last decades reducing the number of young workers and consequently, the amount of money poured into the state pension assets.

According to the the Spanish Social Security’s latest data, there were 9.58 million pensioners in Spain in December 2017, from which 5.88 million were receiving pensions from government, a number expected to continue growing alongside life expectancy.

In the midst of the ongoing debate on the sustainability of state pensions and the need to at least consider alternative strategies to face the challenge, the Spanish government – alongside other public and private institutions – are increasingly fostering private savings plans, pointing them as a necessary supplement for a more dignified retirement.

On the 9th of February, Spain’s prime minister Mariano Rajoy announced the approval of a reform affecting private pension plans, enabling workers to rescue all or part of their money invested in pension plans after ten years of contribution, without needing to wait until retirement, nor to be under any exceptional circumstance like long-term unemployment or serious illness.

The reform, affecting 8 million Spanish people invested in private pension plans, was designed to boost private savings as well as to encourage younger workers to hire these savings products.

However, there are concerns that this could conversely lead to a massive withdrawal of money that would be later spent, thus rising consumption and tax venue instead of serving for reinvestment. But Ángel Martínez-Aldama, chairman of the Spanish asset management industry body Inverco said: “ We foresee some €40,000m in plans likely to be rescued under that assumption by 2025, however we don’t expect massive withdrawals of money.”

Although Inverco welcomed the reform, it has urged the government to take into account the corporate pension schemes operating in the UK: a semi-compulsory model promoted by the British government in which companies offer pension schemes to their employees.

Martínez Aldama said: “It aims at ensuring workers that the pension they will receive when retired is as similar as possible to their last salary.

“Our priority is to see the government complying with the 2011 law, which forces the executive to send a letter to all employees telling them how much money they will receive from their state pension.”

Rajoy also announced a lowering from 1.5% to 1.25% in the commissions savers pay for their private savings, and underlined that both measures were seeking to encourage private savings – at a time when the sustainability of pensions had become one of the main problems of Spain – but never pretending to jeopardise the public pension system ‘whose continuity was guaranteed’.

FUNDING SHORTFALLS

Although the number of contributions to pensions grew significantly in 2017, also did it the deficit of the state pension system amounting to around €18.8bn.

Spain’s state pension system is contributory with a minimum contribution time of 15 years required to access to a contributory retirement pension. With that minimum of 15 years, the pension would be half of their regulatory base, calculated by adding the contribution bases included in each worker’s payroll – equivalent to an approximate amount of their gross salary – during the 21 years before retirement. Despite the next 22 years will be taken into account from next year and so on, the contributions of the last 25 years worked will not be counted until after 2022.

Earlier in 2017, the parliamentary committee for the assessment of the Toledo Pact (a reform of the Spanish Social Security system approved by the Spanish Parliament in 1995, aimed at guaranteeing the future of the Spanish Social Security) finished its latest review of Spain’s state pensions system.

Particularly, the social security reserve fund (Fondo de Reserva de la Seguridad Social o FRSS) is on deficit, so receives occasional financial injections from the government’s general budget to meet state pension payments.

PENSION REFORMS

The Spanish government put forward a proposal consisting of a new formula to recalculate payments for retirement at the beginning of 2018.

The reform aims at enabling employees to get calculated their future wage from either their entire working life or from eligible years (giving them the chance to choose those years when they got paid higher salaries). In addition, the calculation would be made taking the last 25 years of contribution instead of the 21 years used now from 2022.

Some argue the measure would just benefit those who after having paid contributions for a long time, were laid off work during their last years of work or had seen their wages cut in their run-up to retirement.

Previous changes to the calculation of pensions were introduced in 2013, which combined two formulae. On the one hand, the approval of an intergenerational equity factor, which based on an individual’s age, would reduce future pensions payments according to increases in longevity and performance of the social security system (net inflows or outflows) to be made effective in 2019.

On the other, an annual revaluation factor came into force in 2014, which will no longer use inflation in the standard calculation for the amount of uplift reducing the monetary value of state pension increases.

Previously in 2011, the government approved a transitional period from 2013 to 2027 to raise the age of retirement from 65 to 67 years old, thus in 2019, the legal retirement age will increase to 65 years old and 8 months, in 2020 to 65 and ten months, in 2021 to 66 and so on until reaching 67 years old by 2027.

Meanwhile, some experts seem to favour the system of notional individual accounts, operating in Sweden. Like in Spain, the Swedish model is also distributive – in which the contributions of the Social Security affiliates are used to pay the state pensions income of current pensioners. The difference compared with the Spanish system is that the calculation of the pension is based on the total contribution paid during the entire working life, and not just based on the contribution of the last 20 years (the period is to increase until reaching 25 years in 2022). Therefore, when retirement arrives, a conversion factor is applied to this fund of accumulated contributions and returns, which also takes in consideration life expectancy.